Cabinet Approves Ordinance Proposal To Relax Tax Regulations For Foreign Investors

The Union Cabinet has approved a proposal to bring an ordinance to ease tax rules for certain category of foreign investors, a move that comes as India struggles with persistent outflows of foreign portfolio and a weak domestic currency, reports said.

Invest in Indian Markets and Unlock Future Potential With 5paisa!

Open Account Now

According to reports, the proposal was initiated by the Finance Ministry, although specific details of the proposed changes have not yet been disclosed. The development assumes significance as foreign investors have withdrawn nearly ₹2.25 lakh crore from Indian equities since January, while the rupee has depreciated around 6% against the U.S. dollar during the same period.

The reported measure is being viewed as part of broader efforts to improve the investment environment for overseas investors and support capital inflows into the country.

Focus On Government Securities

Separate reports citing official sources indicated that the government is examining a proposal to exempt foreign institutional investors (FIIs) from taxes on investments in Indian government securities.

At present, foreign investors in government bonds are subject to a 20% withholding tax on interest income and a 12.5% capital gains tax. Before July 1, 2023, the withholding tax rate on income earned from government securities, state development loans and rupee-denominated bonds stood at 5%.
If implemented, the proposed changes could have a significant impact on the taxation regime for foreign investors in India’s sovereign debt market.

Part of a wider policy response

The announcement of the tax relief comes amid rising concerns about outflows of foreign capital and currency fluctuations. Policy-makers have been considering measures to insulate the economy from external shocks, including high energy prices and disruptions linked to geopolitical tensions in West Asia.

Reports also suggest the government has been considering other support measures, including a government-backed credit facility for businesses, assistance for exporters and selective duty adjustments to ease the economic impact of higher global commodity prices.

The Reserve Bank of India is also scheduled to announce the outcome of its Monetary Policy Committee meeting on June 5, with market participants closely tracking any measures related to liquidity, inflation and currency stability.

Long-Standing Demands From Foreign Investors

Ahead of the Union Budget, foreign portfolio investor representatives had sought revisions to India’s tax framework for listed securities. Among the issues raised were capital gains taxation and the simultaneous application of securities transaction tax (STT).

Over the years, changes in long-term and short-term capital gains tax rates, along with the continuation of STT, have been highlighted by market participants as factors affecting investment returns.

Though the government hasn't officially announced the details, any tax relief for foreign investors might be a big deal. With the need to attract overseas cash being super crucial for both financial markets and the wider economy, any related policies could get close scrutiny.